Brazil Politics January 2016

After months of rumors and a year characterized by recession, high inflation and political gridlock, Joaquim Levy left his position as Finance Minister on 18 December, as Latin America’s largest economy continues to sink deeper into economic crisis. Levy’s tenure had been characterized largely by political infighting and policy standstill as a fragmented Congress and President Dilma Rousseff’s record-low approval ratings hampered the government’s efforts to pass fiscal tightening measures and economic reforms. Former Planning Minister Nelson Barbosa took over as Finance Minister on 21 December, inheriting the job of trying to correct the government’s sinking finances amid the worst economic data in over a decade. The benchmark Ibovespa stock index closed at an over-six-year low following Levy’s departure, as concerns that Barbosa, who is more left-leaning than his predecessor, will shy away from austerity measures. While an economic strategy is not expected to be unveiled for a few weeks, Barbosa has stated that he will continue to push for fiscal tightening, but has signaled that he may take a softer stance than Levy.

On top of the rampant high levels of inflation and shrinking economic output, Brazil is facing a number of challenges at the onset of 2016. The country lost its credit-grade rating late last year and a challenging external environment is limiting potential gains from the external sector. Moreover, political tensions in government came to a head in December when Speaker of the Chamber of Deputies, Eduardo Cunha, initiated the process of impeachment against Rousseff. While at this stage impeachment seems unlikely, the process could take months and may push much-needed economic reforms to the backburner. Marcos Casarin, Head of LatAm Macro Services at Oxford Economics, adds:

“For now, our baseline scenario assumes that the ruling party (PT) will exchange political favors for the votes required to block the impeachment proceeding against the president. This process may last until the end of Q2, after which time attention will start to turn to the municipal elections this October. If this is the case then 2016 will be similar to 2015: another year of political uncertainty, fiscal slippage, GDP contraction, above-target inflation, rating downgrade and FX depreciation. What is more, if the economic reforms do not start to be discussed and voted on before the end of the year, the current economic paralysis is likely to extend well into 2017. In that case, GDP could contract for three years in a row – something unprecedented in Brazil’s history.”

At this point, Brazil’s economic prospects are grim. The economy is unlikely to rebound without vital reforms and analysts are doubtful if the government has the ability or willpower to pass them through a hostile Congress. The analysts we polled for this month’s LatinFocus Consensus Forecast see the economy shrinking 2.6% this year, which is down 0.8 percentage points from last month’s forecast. For next year, the panel sees the economy rebounding to a 0.9% expansion.

Retail sales (excluding cars and construction) fell 1.5% from the previous month in seasonally-adjusted terms in December, which contrasted November’s revised 1.0% increase (previously reported: +0.7% month-on-month).
Declines were seen nearly across the board, with only two of the eight components of the index seen growth in sales.

At its 7 February meeting, the Central Bank of Brazil’s Monetary Policy Committee (Comité de Politica Monetaria, COPOM) decided to cut the benchmark SELIC interest rate by 25 basis points, a smaller cut than the 50 basis-point reduction it made at the previous meeting.